2/16/2010 @ 11:50AM

India's Hidden Gems

Rolling Stones front man Mick Jagger said he became interested in cricket when he watched a young Dennis Lillee play the sport. True, business is less of an event for spectators than it is a narrative. But how do you figure out who has the big story? Only a few entrepreneurs manage to find great success. Those are the firms that create wealth for themselves, their shareholders, their employees and their suppliers.

Most entrepreneurs in Forbes India’s “hidden gems” list fit the bill. They make their money in businesses as varied as coal tar pitch, cooling solutions, water desalination, building truck bodies and even water treatment. They overcome adversity. Most are unlisted companies that are likely to go public at some point. While a few are already listed on the stock exchange, they are still small and have growth left in their sails.

The most critical task was identifying these companies. We decided to follow the moneymen. We pored over a list of 800 deals private equity companies had done over the last four years and looked for companies that saw a sharp rise in sales, profits and valuation.

Then we performed a taste test. Discreet calls to a few private equity investors who have made serious money told us the companies on our list were highly regarded.

Then we applied a third hurdle. If there was more than one private equity investor in the company, then that was one more thing in its favor.

Having identified the gems, we got
Dun & Bradstreet
to verify the financial numbers that companies were disclosing to us. Only when both sets of numbers aligned did we move ahead.

The list that emerged had one striking common feature. Except for three companies–Acme, ACB (India) and Firepro–the other seven companies are actually old firms that have been refurbished through smart business model changes and passionate entrepreneurship.

Almost 90% of the businesses in India are family owned. Once companies like these were thought of as middling companies that would disappear once the IIT-IIM (Indian Institute of Technology-Indian Institute of Management) crowd applied their newfound skills to business.

That has not happened. Instead, the family-owned businesses have gone out, picked up new technology, learned to value professionals and experimented with different strategies. Just look at Himadri Chemicals and Cebbco.

The gems on our list are scattered all across the country–from Jabalpur to Thrissur.

It is rewarding to see blue-blooded Wall Street firms understand and finance some of these old businesses. Ten years ago
Goldman Sachs
would have financed an IT services firm, while a company like Sudhir Gensets would have been dismissed. But now times have changed. Goldman invested in Sudhir because it sees a company that serves a real need and has value that could last for generations, like a fine gem.